Why Argentina’s Golden Days Faded, and Why It’s a Huge Bargain Today

2016-03-04With the election of a pro-market president, there’s a good chance that Argentina could make investors huge profits. Here's how...

Every country has traditions. And to understand the traditions, you have to have some grip of history. A country’s history goes a long way toward explaining what it is, and where it’s going. Because of its size, geography, and large European population, Argentina might have evolved the way the U.S. did. And it comes closer than any other country in Latin America. But there were critical differences.

In what was to become the U.S., colonies were founded by independent citizens. Many of them, although religious fanatics, were of an anti-authoritarian bent. This was abetted by England’s Common Law tradition, which transplanted nicely to America. In Argentina, on the other hand, every city was founded by the Crown; the Church and the State were held in high regard from the first. This resulted, predictably I’d say, in stunted economic and social progress. Imports, exports, and manufacturing were tightly controlled by the Crown, for the benefit of the mother country and favorites who gained monopolies. Mostly, the economy consisted of wild gauchos rounding up wild cattle on the pampas until well into the 19th century. But things took a radical turn in 1880.

The Golden Era

As late as 1880, Argentina had nothing to offer but open spaces, and one-third of the country was still controlled by indigenous Indians. But by 1910, it had one of the world’s longest railway systems and a sizable middle class, and the phrase “as rich as an Argentine” was current. It was in that 30-year span that all of Buenos Aires’ great buildings were built and when the city could reasonably be compared to Paris. It was a golden era, when Argentina became free-market oriented and discarded the mercantilist ideas that stultified the rest of Latin America.

In the late 19th century, classical liberal ideas were ascendant all over the advanced world; currencies were sound, taxes low, and regulation nonexistent. Borders, which had previously been thought of as something to keep people, merchandise, capital, and ideas from flowing out, were opened. And, as a consequence, paradoxically to statists, all of those things instead flowed in. It was only the Hispanic cultures that were stuck in the past, tied up in traditions dictated by their spiritual and temporal rulers in Rome and Madrid. But the two to three hundred caudillos who controlled Argentina reached something of a consensus on political philosophy, and decided they didn’t want to be left behind. They made radical changes in the way their world worked. And, like America’s founding fathers, they resisted giving a vote to the people at large (namely those without property), for fear that exactly what later happened (in both countries) would happen. The peso was sound; people could save and plan for the future.

The liberalization they engendered encouraged mass immigration. Argentina, at the time, looked every bit as good as America. Millions of opportunity seekers (mostly Italians, but plenty of Germans, Jews, Irish, and Lebanese, as well) left their constipated and conservative homelands, bringing their talents and skills. Immigrants are always (at least in the absence of attractive welfare benefits) the very best of people, something that blowhard racists can’t seem to understand.

The waves of immigration during the Golden Era made Argentina different from other Latin American cultures. It’s said that the Mexicans came from Aztecs, the Peruvians from Incas, the Guatemalans from Mayas - but the Argentines came from ships. It’s why Argentina is the most European of the United States’ southern neighbors. Of course, the flip side of that is a joke (and Argentines specialize in jokes about themselves): “An Argentine is an Italian who speaks Spanish, but thinks he’s British.” Economic liberalization made it possible to take advantage of three new technologies that were tailor-made for both Argentina and America:

Barbed wire, which made it possible to easily define property lines, and for ranchers to control their cattle. It also made farming possible, by keeping the cattle out.

The Australian windmill pump, which greatly increased the amount of usable land. Prior to the pump, both cattle ranching and crop farming were dependent on available surface water.

The refrigerator ship, which allowed Argentina to become the world’s second largest exporter of meat (after the U.S.). The steamship allowed it to become the world’s largest exporter of grain.

In the course of a generation, Argentina went from a backwater to being the third or fourth richest country on the globe.

Schumpeterian Tragedy

Joseph Schumpeter certainly wasn’t the first to observe that success tends to carry the seeds of its own destruction, but he was the first (in the late 1930s) to argue that capitalism’s very success guaranteed it would be replaced by some form of collectivism. As you know, I’m the eternal optimist, believing that mankind will eventually shed most of its flaws and vices as knowledge accumulates and we advance toward the stars. Unfortunately, however, that viewpoint isn’t terribly relevant in terms of anyone living today, or likely for hundreds of years to come. Still, it’s nice to keep a happy thought. History, since Schumpeter’s death in 1950, would indicate he’s probably right. Institutions, families, systems, and states, like individuals, tend to degenerate as they age. It sometimes seems as if the whole world is fated to someday look and act like the Kennedy family.

It certainly happened to Argentina. As soon as it reached its apogee, just before World War I, it began a process of decline. Gradual at first, since it had so much accumulated capital it could live off of. And its people had learned good habits, which also took time to become corrupted. It also avoided some bad luck; when the rest of the world nearly bankrupted itself with two world wars, Argentina stood aside and sold as much as it could to all combatants.

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Things really started to come unglued for Argentina in the 1930s. Of course, that was true everywhere. Hitler in Germany, Stalin in Russia, Mussolini in Italy, Roosevelt in the U.S., Franco in Spain - the whole world went crazy in the ’30s as the world economy collapsed (as it seems about to do again). Since Argentina was full of Spaniards, Italians, and Germans, and heavily influenced by the Roosevelt regime in the U.S., it went fascist in a big way; its first military coup was in September 1930. Massive corruption and perpetual election fraud became Argentine traditions, with the poor (known as descamisados, or “shirtless ones”) being promised loot stolen from the rich. The most opportunistic people got into politics to steal from everybody, while the middle class was squeezed. The collapse of commodity prices in the ’30s depression was especially bad for Argentina. Stupidly, but predictably, the government responded by setting up a central bank, which proceeded to destroy the currency. Massive regulatory agencies and “marketing boards” for corn, wheat, cotton, wine, and you name it pretty much aped Roosevelt and Mussolini.

The Argentine government burned wheat, the Brazilians dumped coffee in the sea, the Americans poured milk in the gutter. Then, most of the world engaged in an orgy of mass slaughter in the ’40s.

But the ’40s actually provided a respite for Argentina. Many countries became net debtors from purchases of food. Though the war was good for agricultural exporters, it made it very hard to import machinery. So, small industries sprang up to meet demand, which seemed like yet another benefit of the war. In fact, it was another disaster in the making, since they were all inefficient, and all wanted protection after the war.

Then, of course, came Perón, a military man, elected by labor and the Church in 1946. It was like a conjunction of the planets the astrologers talk about: the three most reactionary and backward elements of society (the military, the unions, and the Church) got their political “dream team” with Juan Domingo and his wife, Evita. It was as if Bonnie and Clyde were appointed chairmen of the Federal Reserve.

Soon, practically all industry was nationalized, which not only evaporated the country’s reserves of gold and dollars built up over decades, but destroyed the industries they bought for decades to come. The railroads, strangled in regulation and denied capital, became uneconomic and unreliable. The government bought up all the radio stations, making them, at once, into money losers and instruments of state propaganda. They started state newspapers. They impeached and replaced Supreme Court justices.

You might think that Argentina would have gone into a disastrous collapse immediately. Actually, however, most people loved these two miscreants, for the same reason people love anybody who throws a wild party: it’s a lot of fun to drink a whole bottle of Johnnie Walker Blue in one night, or blow a lifetime’s savings in a few years, even if it’s not very smart. Living off of capital made Perón popular.

Modern Times

As you know, it’s not my custom, when analyzing a country, to spend this much time on its history, if only because it’s impossible to say much that’s credible in such a brief space. But I’ve got a feeling that Argentina in some ways represents a compressed picture of America, played on fast-forward in much the same way Ancient Rome can be viewed as an extended preview of America, played in slow motion.

I wouldn’t, therefore, be surprised to see America go the way of Argentina. Maybe the descent of the U.S. economy in the years to come (for reasons I’ve detailed enough in the past to dispense with here) will result in a resurgence of violent “radicalism” such as the U.S. saw in the ’60s or Argentina saw in the late ’70s. Maybe the U.S. government’s Forever War on terrorism will blossom into something like Argentina’s Dirty War against “terrorism,” which saw somewhere between 15,000 and 30,000 politically unreliable civilians “disappear.”

An outlandish thought? I think the existence of thousands of armored SWAT teams, a dozen praetorian-style federal agencies, and a Department of Homeland Security are more than just straws in the wind. Argentina’s domestic Dirty War was followed by the Falklands (or Malvinas, as Argentines prefer) adventure in 1982, when the government sought to distract the populace from a disastrous economy, and horrendous civil rights abuses, by whipping up nationalism through the conquest of a nearby island group populated by English sheepherders and fishermen for over 150 years. Despite sinking two British destroyers and two frigates, the Argentine military was routed.

Their defeat was a good thing, though, because it thoroughly discredited the military and its generals (who, like most in the Third World, were basically pompous political hacks who liked strutting around with gold braid and bogus medals).

Then came Menem in 1992. Although plagued by a ridiculous ’70s vintage haircut, and predictably corrupt cronies who reaped billions from his privatization of state industries, Menem was still probably the best thing that happened to Argentina since at least World War II. He was certainly no free marketeer, but he at least had the common sense to see that something had to be done to roll back the State. Most importantly, he implemented a currency board, based on the ideas of Steve Hanke (with whom I’ve spent some time at Johns Hopkins), which attempted to ensure that every peso was backed by a U.S. dollar.

As a result, Argentina had 10 prosperous years, from 1992 to 2001. But Menem’s reforms were half measures, at best, the equivalent of giving vitamins and amphetamines to a cancer patient. They were completely inadequate to cure the rot.

Money

I can’t remember how many currencies Argentina has run through since it went off the gold standard, but they’ve all eventually reached their intrinsic value.

Although the central bank theoretically backed every peso with a dollar in the 1990s, a problem inevitably arose because the commercial banking system operates on a fractional reserve basis; so, they created, through lending, several pesos for each dollar-backed peso held by the central bank. People, although generally ignorant of economics, could see that eventually there would be a run on the peso, and that happened starting in 2001. Foreigners stopped investing dollars, and locals went to their banks to change their peso deposits into dollars. By November 30, 2001, depositors were withdrawing up to a billion dollars a day against total deposits of about 70 billion dollars and pesos, but the central bank had only $5 billion to make good.

Seeing the end was near, the government limited all cash withdrawals to $250 per depositor per week, and no one could take more than $1,000 out of the country. The $250 rule devastated business; nobody had cash to buy anything. But the peso was still pegged to the dollar, and, though inconvenienced, people still thought they had their money. Then, in January 2002, the government devalued the peso to 1.40 pesos per dollar, so everyone with a peso account sustained an overnight 30% confiscation. Next, they froze all savings accounts above $3,000 for a year, and mandated that larger accounts could only withdraw their cash in 12 monthly installments after the year.

Things got worse. In late January 2002, it was decreed all dollar accounts were converted to pesos, and banks could only redeem in pesos. This was devastating, since two-thirds of all deposits were in dollars, and the peso was now only worth US$0.60. And depositors still couldn’t withdraw more than a trivial amount of pesos. It was pure theft, a transfer from depositors to the banks.

A New Day in Argentina

Recently, there has been great rejoicing among the people I associate with here in Argentina. Mauricio Macri, the pro-business mayor of the city of Buenos Aires, defeated Daniel Scioli, the Kirchnerite governor of Buenos Aires province, by 52% to 48% of the vote in the November 2015 presidential election. This was an important election for anyone who has money in this country (including myself).

Let me give you some brief background. For the last 12 years, the country was ruled first by Néstor Kirchner (from 2003-2007), then by his wife Cristina, who was elected in 2007, then reelected in 2011. Néstor died of a heart attack in 2010. He’d had the good luck to come into office at the dead bottom of a horrendous crisis. From there, everything cyclically recovered, aided by higher commodity prices; the Argentine economy is based on agriculture. People, idiotically but predictably, attributed the better times to the Kirchners, as opposed to a commodity boom. Néstor was just a garden variety leftist. But Cristina turned out to be a raging statist ideologue, modeling herself on her idol, Eva Perón.

The Argentine economy has been in a steep decline since the accession of Juan Perón in 1952. Perón was an admirer of Mussolini and Hitler and, like them, instituted a regime of strict state control of the economy, enriching well-connected businessmen, while giving all manner of “free” goodies to the peons. The peons felt they were getting something for nothing and, so, subsequently always elected a politician who claimed to be a Peronist.

Cristina took it to another level. She nationalized Aerolíneas, and La Cámpora, her youth group, is said to extract about a billion dollars a year from the airline. She nationalized the country’s biggest oil company, so, of course, there’s been no energy development even though Argentina has some of the world’s biggest shale deposits. She put export duties ranging up to 40% on soybeans, corn, wheat, and cattle, and farmers are expected to pay ordinary income tax on whatever profit is left. She nationalized the country’s pension funds, spent all the foreign exchange reserves, and filled the government with tens of thousands of her supporters. Meanwhile, it’s alleged she personally stole over $10 billion, not counting what subordinates and cronies have scammed.

So, back to the recent election. If Scioli had won, it would have been more of the same, just on a lesser scale. But there’s a good chance that Macri will get rid of lots of gnocchis (as featherbedding government employees here are called), repeal the export taxes, defang La Cámpora, reduce money printing, etc., etc. He’s no Ron Paul, but there’s reason to believe he has, at least, a basic understanding of economics.

He’ll be forced to take radical action, since Cristina has run the country until its wheels have about come off. But if he does it, a couple hundred billion dollars Argentines have offshore could come home. And as much or more from foreign investors. Sure, people in the government will still steal - that happens everywhere except maybe Singapore. But, as I’ve said for years, if the country gets a government that’s anything but criminally insane, the place could, and should, boom. At a minimum, asset prices, which are now extremely low, should rise to world levels.

I came down here because I liked the lifestyle - and despite Cristina, it remains one of the world’s best. But now, there’s also a good chance that those of us who put money here in the last decade, after years of being laughed at, could make a bundle. And the lifestyle will get even better...

The only way to fully appreciate the opportunities in Argentina is to visit in person. So, I’d be remiss if I didn’t mention our upcoming private retreat there.

Specifically, I would like to personally invite you to join me and a group of friends to spend a week together enjoying the community and amenities at La Estancia de Cafayate, the sporting and lifestyle estate in beautiful Salta Province that I helped build.

It will be a week filled with exciting social events, including cocktail parties, horseback riding adventures, golf, tennis, luxuriating at the Athletic Club & Spa, dining out on Cafayate’s scenic plaza, and generally enjoying Argentina.

There will also be plenty of opportunities to network with successful, like-minded individuals from all around the world.

Because of the intimate nature of this event, space is extremely limited and openings will fill up quickly.

For more details on the event and how to attend, drop my associate Juan Larrañaga an email at JoinNick@LaEst.com and he’ll help you get things sorted out.